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That’s why learning Corporate Finance sucks

2007年04月25日 留下评论 Go to comments

Getting more out of offshoring the finance function

Michael Bloch, Shankar Narayanan, and Ishaan Seth

First published in the Spring 2007 issue of McKinsey on Finance

The quality of offshore providers of finance
and accounting services has never been higher. Many have made
significant investments in the control and monitoring mechanisms needed
for high-end functions, regulatory requirements, and complex finance
processes such as valuation reviews, legal-entity control, and tax
preparation. Some have even hired risk-and-control officers to deal
with Sarbanes-Oxley, Basel II, and SEC reporting.

More sophisticated vendors enable companies to cut their labor costs by
as much as 30 to 70 percent for offshored functions, to raise
productivity by at least 5 percent a year, and to improve their control
and risk management. What’s more, these vendors offer
people-constrained finance operations flexibility—the ability to meet
proliferating business needs quickly by tapping into a highly skilled
workforce. Offshoring can also play an important role in even more
comprehensive efforts to streamline the finance function (see sidebar, “Getting started and staying with it”).

Yet very few companies have come close to capturing the full potential
of offshoring finance operations. Indeed, a majority of the companies
that have offshored some of them did so only in the past 24 months and
are thus just getting past the start-up stage. In our experience, the
problem is the faulty assumptions that companies make about what gets
sent offshore to whom—and when. Rethinking key design decisions can
therefore begin to deliver some of the untapped value.

And they should be rethought, because we continue to find that
companies make suboptimal design choices when crafting offshoring
programs. Some lack awareness of the vendors’ capabilities or feel
pressure to capture near-term cost benefits without thinking through a
two- or three-year plan strategically. Others have preconceived notions
about what they must keep close at hand. Certain design components are
unique to individual companies, of course, but a number are common to
almost all offshoring efforts. These components are the cornerstones of
any offshoring-enabled transformation of the finance function.

Go beyond the basics

Many finance executives limit offshoring to commodity and transactional
activity. They believe that only such basic tasks can be performed
remotely; everything else is strategic and critical to the business and
must therefore stay local.

Some companies are thinking bigger: certain GE companies, for example,
have successfully offshored as much as 35 to 40 percent of their
finance activities. The offshored operations include not only typical
accounts-payable and time-and-expense work but also a full range of
accounting and control functions, decision support and regulatory
activities (including some management reporting, 10-K and 10-Q
preparation, and SEC filings), and expert functions such as tax
compliance and cash management within treasury.

Furthermore, some forward-looking CFOs are moving away from piecemeal,
task-level offshoring. Using offshoring as a tool for a fundamental
redesign of the finance operating model, they are reconsidering which
finance functions absolutely must be performed in or near headquarters.
At one global high-tech company based in the United States, the CFO
went so far as to offshore significant portions of all the finance
functions systematically, including procure-to-pay, order-to-cash,
record-to-report, financial reporting, planning and analysis, treasury,
fixed-asset management, and taxes. He believes that in his end-state
model, advances in communication and work flow technologies will make
it possible to locate more than 75 percent of the finance operation far
from the corporate center or country headquarters. This company now
sets the low benchmark for finance costs in its industry.

Ship, then fix

Too many executives believe that processes, and the underlying IT
applications supporting these processes, must be optimized perfectly
before they can be sent offshore. Many Fortune 500 companies that have
embarked on projects to implement financial systems or commercial
enterprise-resource-planning (ERP) applications, for instance, believe
erroneously that it would be wrong to offshore processes and systems
while such projects are under way. Some want to wait until all finance
activities or processes have been completely migrated to the new ERP
system, others until general ledgers have been fully integrated. This
propensity to fix processes before outsourcing them—the “fix, then
ship” model—is single-handedly responsible for much of the gap between
leading-edge offshorers and average ones.

In our experience, offshoring a process first and then implementing
continuous-improvement efforts—the “ship, then fix” approach—typically
delivers one-and-a-half to two times the net present value of the “fix,
then ship” approach. Offshoring generates higher savings at a faster
rate than large process-redesign and automation exercises, which often
take three to four years for benefits to accrue.1
The difference in value is especially visible in large, high-cost
markets (such as Australia, Japan, and the United States), as well as
some Western European markets (for instance, Scandinavia, Switzerland,
and the United Kingdom). Companies in these markets typically have
stable, stand-alone IT systems, are large enough to achieve scale in
offshoring, and benefit from labor laws favorable to it.

Smaller companies or those in markets with restrictive labor laws2
can still benefit from the “ship, then fix” approach. We’ve seen
several implement significant offshoring programs without any internal
job losses by aggressively reducing the use of outside contractors and
temporary personnel, retraining and transferring finance personnel to
other functions, and leveraging early retirements. When these methods
don’t apply or a market doesn’t have critical mass on its own (because
it has very few finance professionals or the scale of a company’s
business in it is small), a more gradual “fix, then ship” approach
could be preferable.

Some global companies may want to strike a balance between the two
approaches by simultaneously migrating businesses to new systems
platforms and moving finance and accounting resources to regional or
global shared-service centers. This line of attack is particularly
suitable for companies that have already mastered offshoring
transitions and developed clear and detailed transition methodologies.

Diversify locations

Many companies still view India as the only location for their
offshoring requirements. Although it is perfectly reasonable to start
by offshoring jobs to English-speaking countries, that won’t suffice
when companies truly seek to expand their offshore work. Some of them
need offshore providers whose employees can speak languages other than
English for activities such as customer service and contacts with
suppliers. Others must ensure that business continues in the event of
potential disruptions such as natural disasters, wars, or political
unrest. Further, in India the number of employees providing offshore
finance and accounting services has increased sixfold over the past six
years. This dizzying pace of growth has begun to place a strain on the
middle- and senior-management layers at many Indian finance-offshoring
suppliers. Indeed, our analysis3
suggests that for various business-process-outsourcing segments,
including finance and other functions, India will probably face a
talent shortfall of up to 500,000 full-time-equivalent employees by
2010. (The analysis is based on the McKinsey Global Institute report, The Emerging Global Labor Market, available free of charge online.)

Genpact, the former GE subsidiary, is a good example of a company that
has carefully crafted a multilocation model. It provides GE and other
clients with finance and accounting services from five countries:
China, Hungary, India, Mexico, and Romania. Similarly, P&G picked
Costa Rica for its shared-services center in the Americas but turned to
Newcastle and Manila to serve Europe and Asia, respectively.

Making a good match

For control and compliance reasons, some companies believe that they
must set up their own company-owned and -operated—that is,
captive—offshore centers. For some early movers (such as British
Airways and GE), captive offshore finance and accounting operations
made sense because in the past there was no capable vendor community.

An analysis of public data sources, however, reveals that of 30 companies4
that have embarked on new finance-offshoring efforts during the past
two years, 26 have chosen to work with outsourcing providers. These
providers offer faster service, using a more talented group of analysts
at a sustainably lower cost than companies could realize by themselves.
Indeed, our analysis5
shows that, on average, the total cost of providers is 30 percent lower
than that of captive operations. Indeed, only the very best captive
centers achieve similar—and sometimes better—levels of performance and

Companies that decide to work with an offshore vendor would be well
advised to evaluate their potential partners carefully to make sure
they pick one that makes the right fit—strategically, operationally,
and culturally. At this point, at least three kinds of providers are
investing heavily to build their capabilities: former captives, global
service providers, and service providers based in India. Each type of
provider brings distinct strengths but also faces unique challenges.

Offshoring can give the finance function powerful benefits that go well
beyond labor cost arbitrage. The design of offshoring efforts can make
all the difference in how quickly and effectively companies can reap
those benefits.


Recent surveys by Financial Executives International and the Standish
Group show that a very significant portion of large ERP programs are
considered partial successes at best.

Western European countries such as Belgium, France, Germany, and the
Netherlands, as well as countries in Asia and Latin America.

3 See also Diana Farrell, Noshir Kaka, and Sascha Stürze, “Ensuring India’s offshoring future,” The McKinsey Quarterly, 2005 special edition: Fulfilling India’s promise, pp. 74–83.

US or Western European Fortune Global 500 companies that publicly
announced their intention of offshoring finance functions to locations
in Eastern Europe and India.

This analysis tests the alignment among key stakeholders—such as
agents, team leaders, offshore senior management, and onshore
clients—on operational focus, performance, and health along 12 key
operating practices such as recruiting, talent management, process
improvement, governance, and support processes. It also benchmarks the
performance of service providers by key operational metrics such as
cost, quality, speed, flexibility, innovation, and risk. As of this
writing, we have rated more than 23 captive and third-party providers
that perform more than 162 processes. Our surveys have involved more
than 4,800 respondents. See the Nasscom-McKinsey report, Operational Excellence: The Next Frontier in Offshoring, February 2007.

  1. lei
    2007年04月25日 @ 12:04 下午


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